Chairman John Wilson said the lower forecast reflected continuing volatility, with the GlobalDairyTrade price index declining 6 per cent in the past two trading events.
Wilson said the market is presently influenced by strong milk production globally, the impact of Russia's ban on the importation of dairy products, and the levels of inventory in China.
Asked how farmers would respond to the downward revision to the forecast, chief executive Theo Spierings said: "The cashflow coming out of last year, with the final payment at a record high, is still going to help cashflow on the farm until Christmas. If at Christmas we are still looking at [a farmgate milk price of] $5.30, then it becomes difficult," he told APNZ.
"Then you will see supplementary feeding going down and investment intentions being deferred, because $5.30 is not a level where you can really do farming the way you want to do it, to drive efficiency and sustainability, so these sorts of things will come under pressure."
Spierings said he remained optimistic about the dairy scene "but these kind of extreme situations will occur".
The Russian ban meant the effective return of 250,000 tonnes of cheese - the equivalent of 2.5 billion litres of milk - to Europe.
This, combined with a 4 per cent increase in the European milk pool, would mean an extra 7.5 billion litres of milk - equivalent to about one third of New Zealand's total production - would be "looking for a home". Spierings expected the extra milk production would end up as anhydrous milk fat and skimmed milk powder.
Fonterra's most important product line is whole milk powder.
"So we have to drive wholemilk powder very, very hard because that's where we make our money," he said.
Last year's high milk prices drove Fonterra's earnings sharply lower for the financial year to July while the current year's sharp drop in prices forced the co-operative dairy giant to lower the farmgate forecast.
Fonterra said its "normalised" earnings before interest and tax came to $503 million for the year to July, down 50 per cent on the previous year's, as high milk prices put pressure on the co-operative's profit margins.
The higher cost of goods sold, along with higher interest and tax, saw Fonterra's net profit after tax fall by 76 per cent to $179 million.
High milk prices, while a boon for farmers, are an added cost to some of Fonterra's manufacturing, and dividend-paying, operations.
"Constrained margins in our foodservice and consumer businesses and on non-milk powder products were the knock-on effect, contributing to a 27 per cent rise to $19.8 billion in the cost of goods sold," Spierings said in a statement.
While Fonterra said it had cut its forecast farmgate milk price, it nevertheless increased and widened its dividend forecast to 25c to 35c from a previous forecast of 20c to 25c.
He said the new forecast was based on the assumption that the price of whole milk powder recovered to about US$3500 a tonne - which is the five-year average - by next March from US$2692 a tonne at the last GlobalDairyTrade auction.
Last year's "false positive" whey protein scare and product recall cost the company $30 million in lost contracts and Fonterra still faces legal action from one of its previous major customers, Danone, which had to recall thousands of cans of infant formula in response to the incident.
Fonterra still faces a ban on whey protein and base powder exports to China as a result of the scare.
Spierings said progress was being made in securing the necessary regulatory approvals and proceeding with the partial tender for a shareholding of up to 20 per cent in China's Beingmate. APNZ
